TV Companies: Is the Secular Decline Thesis Overdone?
Following a review of six of Europe's TV companies Willis Welby argue that not only is their reach to consumers materially better than the long-term bears would have you believe, but these companies all look extraordinarily cheap! Willis Welby continue to be particularly bullish on ITV - positive momentum and it is likely to make a mockery of an implied to Y3 EBITM ratio of barely 30. While TF1 also looks very interesting following its proposed merger with Metropole TV.
AO World (AO/ LN)
Tougher cycle ahead - market expectations for FY22 and beyond are far too optimistic. StockViews’ research reveals early evidence of a sharp inflection in growth and increasing competition. They also argue that plans to expand into new product categories will be dilutive to margins and high-margin ancillary revenues, such as product protection plans, have stopped growing. AO's massive premium to Dixons Carphone is not justified by the fundamentals. 45% downside.
UK Supermarkets: Ripe For Activism
Following Asda’s buyout last year and Morrisons rejecting a £5.5bn takeover earlier this week, Will Nutting looks at what is driving private equity interest in the sector. He also explains why he believes Tesco would make an ideal candidate for activist involvement and why management should be aggressively buying back stock. While Sainsbury’s and Waitrose both remain viable acquisition targets, he remains very bearish on Ocado - besides valuation concerns, it is too small and consequently while it's best in class tech solution may give 50-100bp advantage it’s weaknesses in other areas make it ultimately uncompetitive.
Zooplus (ZO1 GR)
An online-only niche business that has outcompeted Amazon and built real scale economics - it has a 40% share of the EU online pet food market and its customers love it, but Mr Market less so. Why? Well, it is a little old-fashioned in its desire to grow slow and steady, generating scale, customer loyalty and cash along the way. Its US peer (Chewy) has grown itself and its end market (US only) far faster and as a result trades on c.5x sales (vs. Zooplus on a lowly 0.88x). One day either Zooplus’ scale economics payoff or Chewy comes calling…
DS Smith (SMDS LN)
Following a review of the company’s FY results Teun Teeuwisse's short thesis remains firmly intact - FCF beat was driven by stretched payables and was not reflected in lower net debt. Management like to apply all sorts of definitions to prove the company’s quality, but in reality the quality of results remains weak and SMDS has hidden debt which is at least the size of its reported debt. Recent share price strength has been driven by rumours of a takeover by Mondi, but Teun continues to regard any bid as highly unlikely.
SII (SII FP)
Recovery is far from over; well placed to gain market share - Julien Onillon sees no reason for SII to be valued at multiples lower than those of its major competitor Alten. Over the past 12 months, SII has managed to report earnings comparable to 2019, including the best half yearly result in its history. Demand for engineering consulting in France has returned to its pre-crisis level and the group has continued to show exceptional growth in Poland, its most important international market. Based on an EV/EBITDA 2022 of 10x, Julien sets a TP of €44.00 (~50% upside).
DoorDash (DASH)
Clear case to be made that DASH can rise from an upstart restaurant ordering/delivery company into an empire spanning Restaurants, Convenience, Grocery and other CPG categories. Hedgeye believe that the company can easily exceed $70bn in Marketplace GOV in FY24, up over 80% from $37bn in FY21. Their bullish thesis also includes DASH’s opportunity to monetise DashPass (compares it to Amazon Prime/Starbucks Rewards) and its potential to capture substantial market share in the digital advertising space.
Pinterest (PINS)
Early in its pivot towards monetisation, clear upside to ARPU - short-term cliff fears (growth slowdown) are overblown. The pandemic has allowed PINS to broaden its user base and verticals, which combined with investments into monetisation tools along with the expansion of advertising budgets into more niche social media will lead to an acceleration in monetisation of the platform. Estimates 30% revenue growth and 40-50% EPS growth for the next three years. TP $101 (35% upside).
Small Brands Making Some Big Noise
The Retail Tracker offers an insightful perspective on retail, fashion and consumer trends. In their latest weekly Insights & Intelligence report they highlight the following exciting brands:
Rowing Blazers: Every decade or so a new brand appears on the scene, small and nichey at first, to take on the “preppy” space and modernise it.
Daniel Fletcher: Launched into the stratosphere by Netflix and Next in Fashion, Daniel Fletcher is the one to watch in menswear.
Entireworld: The merchandise is cool, wearable for everyday and very well priced.
Pehr: All organic, with a small environmental footprint but importantly it has the look and feel (and IG followers) to speak to new mothers.
Lululemon Athletica (LULU)
Following a stellar spring quarter, LULU has eased ever-so-slightly 2QTD and needs to hit the accelerator again. The company faces growing competition from Athleta and Sweaty Betty, performancewear king Nike and an on-fire Target whose new value-priced All-in Motion brand is capturing share of wallet almost across the board. Craig Johnson also flags LULU’s relative soft spot in bringing more men to the party and how pricing is a problem that needs to be addressed.
Walgreens Boots Alliance (WBA)
WBA’s strategy is stale and increasingly disintermediated. It requires a complete pivot to maintain relevancy, but new CEO Roz Brewer’s lack of strategic vision and relevant experience positions her poorly to implement such a change. She will continue the strategy set by domineering Chairman Stefano Pessina and multiple overly tenured executives/directors averse to change. WBA's stock has rallied 15% since the announcement of Brewer’s appointment and trades above CVS Health on both a PE and EV/EBITDA basis, despite slower growth, similar leverage and worse competitive positioning.
Westlake Chemical (WLK)
Boral acquisition to trigger positive valuation re-rating - the $2.15bn purchase will take WLK’s Building Products revenues to $3.1bn (from $2bn in 2020). US building products companies currently trade at a 2021 EV-to-EBITDA multiple of 16x vs. commodity chemical companies at 6.5x. On a post-acquisition basis WLK could breakout its Building Products business as a separate segment and get a commensurate multiple re-rating, thereby making an already earnings accretive acquisition highly valuation accretive as well. Given current secular and structural tailwinds in the housing market this looks like a well-timed acquisition. TP $135 (~50% upside).
SentinelOne (S)
Exciting IPO in the next generation cyber security end point protection market. SentinelOne has emerged as one of the strongest competitors in the sector. It benefits from the same market drivers that have provided a great opportunity for CrowdStrike, including a large and growing market that has a desperate need for a next generation solution and a competitive environment that includes legacy vendors (Symantec, McAfee, etc) who have fallen behind. Sales Pulse’s channel partners confirm growing win rates due to the vendor’s leading technology and aggressive channel programs.
Flying Fortresses: Making Money with a Margin of Safety
Less than half a percent of the stock market is trading below 10x earnings today - the lowest level ever. Kailash’s latest piece aims to help investors looking to add a bit of deep value to their portfolios. These firms must have a market cap of $1bn+, a 10% FCF yield, be investment grade, and growing revenues at 5% or more. Investing in these “Flying Fortress” stocks has, historically, generated outsized returns. Stocks highlighted include Best Buy, PulteGroup, Molina Healthcare and Polaris.
Short Value/Long Growth
The cyclical alpha bounce is over and cyclical stocks are getting dumped. Materials -9% alpha (since 17 May), Industrials -5% (since 3 Jun), Financials -8% (since 3 Jun) and Energy -9% (since 8 Mar) - Michael Belkin’s model forecast sees this as the beginning of an extended trend lasting for at least the next three months. Meanwhile, shorts in EVs (-54% alpha), Solar (-40%), ARKK Fund (-37%) and Cloud Software (-22%) were all closed last week. The model forecast has now shifted in favour of Tech - FANG stocks have become defensive longs.
Brambles (BXB)
Porter plus price - having covered BXB for more than 10 years, Rimor have been surprised by the significant underperformance over the last year and have (virtually) revisited several industry contacts in recent months. Despite much discussion on pallet shortages and cost inflation, Rimor analyse management actions to make earnings more resilient, detail the state of competition in the market and examine the risks from plastic pallets being ramped up. With BXB trading at the low-end of relative valuation ranges it provides an attractive entry point for investors.
Didi (DIDI)
Didi’s IPO comes fast on the heels of RedTech's May ride-hailing survey which found Didi to still be very dominant, but losing share, while ride-hailing usage was also in decline. Didi has been losing out to a rise in taxi usage and small gains for Meituan and other competitors since 2017. Since expansion in ride-hailing may be difficult due to the antitrust atmosphere in China, RedTech has also been looking at the potential of Didi’s grocery delivery business...
IndusInd Bank (IIB IN)
CG Power loan scandal - IIB pioneers lending without documents to a firm with no assets! Hemindra Hazari offers his latest thoughts, having been one of the first analysts to caution investors regarding the incompetence of the bank’s corporate credit and risk management. Even though these issues are now on full public display, the fact that the bank’s board of directors have rewarded senior officials involved speaks volumes of the corporate governance culture prevalent in the bank.
Industrials Rotation
After a multi-year decline, active Asia Ex-Japan fund managers are growing increasingly bullish on the Industrials sector. It is now the 5th most widely held sector, but average weights are fraction of the dominant quartet of IT, Financials, Consumer Discretionary and Communication Services. Steven Copley highlights seven companies likely to feature in the investment decisions of fund managers in the region should the rotation into Industrials continue. These include NARI Technology, Sungrow Power Supply, Voltas, Country Garden Services and CK Hutchison.
MediaTek (2454 TT)
High-quality 5G beneficiary that also offers a very attractive dividend - earnings upgrade cycle set to continue. MediaTek will experience an outsized benefit from the replacement trend brought by technology upgrades to 5G and Wi-Fi 6, Bluetooth, and ARM-based SoCs that integrate wireless communication. It also boasts net cash of $5.9bn (nearly doubled over the past 2 years); management have raised the dividend payout ratio to 80-85% and budgeted NT$100bn for special cash dividends over the next 4 years. The stock currently trades on a forward dividend yield of 5.2%. TP NT$1292 (40% upside).
Bullish Outlook for China’s Console Games Market
China’s console games & hardware market generated $1.84bn revenue last year and according to gaming experts Niko Partners is expected to reach $2.46bn in 2025. Console gamers will climb to 23.9m (vs. 13.2m in 2020) driven primarily by strong sales of the current generation consoles. Total ARPPU for console software was up 6% YoY to $84.00 and is set to reach $91.30 in 2025, due to increased spend across game software, in-game content and game-related services. Subscriptions to benefit console platform holders the most, while F2P and cloud gaming will benefit game developers.
Delta variant to drive third US wave
Naresh Chouhan provides clear evidence that the Delta variant has taken hold in the US, with an imminent rise in cases due. Contrary to popular belief, peak hospitalisations will exceed last waves based on current vaccination rates – more lockdowns are en route. A cocktail of factors will result in a difficult US winter, in contrast to the UK which will be post-pandemic by Q4.
US: Fed leaves policy unchanged, data says otherwise
Chairman Powell mentioned the Fed would give advance notice of policy change decisions, but the data suggests some form of tightening is underway. The jump in reverse repos is the main factor slowing Fed liquidity expansion and is not being offset by a rundown in the Treasury General Account. US monetary base growth has plummeted to 7% from 78% only a few weeks ago. In contrast, the PBoC and BoJ are now looking to be moving in the opposite direction to the Fed.
US: The importance of the money supply
Despite large increases in the US CPI, consensus believes they are transitory. Frank Shostak advises to instead look at the increases in the money supply. He believes we will start to see increases in the general prices of goods and services manifesting from the recent massive increases in money supply. Regardless of how the symptoms of inflation will be displayed, economic health will be hugely dependant on money supply increases, which will set in motion the impoverishment of wealth generators.
Italy: The new Cold War will keep Draghi in Rome longer than anticipated
Ignored by Washington for three decades, Italy has become a key element of China’s pivot to the West with Beijing developing a powerful network of Italian politicians and business elites. Francesco Galietti believes a new Cold War is underway, one that will further tie Italy with Europe and Washington. After the G7, Draghi’s Atlanticism and Western framework will see the chances of him staying around rise exponentially; if he were to leave Rome, China’s network of friends would snap back immediately.
Italy’s Ricostruzione 2.0
For the first time in 20 years, the dynamic of Italy’s economy is shifting. The EU’s Next Generation (NGEU) package will allow Draghi to roll out structural forms that will have a strong impact on the nation’s short- and medium-term economic growth potential until the 2030’s. Long-term headwinds remain, with the dearth of human capital a continuous burden that Italy seems unable to fix.
Japan: Damage done
Monetisation of government debt has resulted in Japan’s monetary data improving over the past year. However, private sector credit trends have weakened and the liquidity boom from excessive QE has come at the cost of undermining the profitability in the private sector credit system. The BOJ has reacted too late; the banking system has been broken and monetary policy is now solely a function of public sector trends.
How to play China in a post pandemic world
David Rosenberg explains that China’s short-term growth will be stymied by policy tightening and deleveraging which will pave the way for a more durable growth outlook. Beijing is looking to counter the headwinds with investment aimed at moving up the supply chain, and opportunities for investors will lie in areas like high-end manufacturing, robotics and biotech. Commitment to a greener future will also see renewable energy, carbon capture and storage provide good opportunities. David mentions that fixed income investors could also benefit from the huge bond market as it opens up to foreigners, a necessary step in establishing the Yuan as the global currency.
China: Policy measures to boost growth
China needs to grow faster to get out of the hole left by lockdowns. Local sources indicate unusual fiscal surpluses at the state and central govt levels in H1/2021, and Carl Weinberg expects deficit spending to resume in an effort to boost aggregate demand, mainly in industrial infrastructure. The PBoC will also ease monetary conditions to arrest the decline in the rate of growth of credit to the economy. Lower interest rates, an abundance of liquidity and a bond rally will subsequently come.
China: Activity to soften further in coming months
Headlines about a spate of industrial accidents across China has prompted waves of mine closures and safety inspections. William Hess believes this headwind will continue into H2/2021, contributing to factors that will see micro activity and related sentiment soften in Jul/Aug. Combined with the Fed’s befuddled messaging, we’ll see negative implications for most commodities, EM generally and cyclicals.
Brazil’s droughts to threaten agricultural output
Climate change and deforestation in the Amazon rainforest are being pointed at as the reasons behind the country’s latest drought, the worst in 91 years. Electricity supply has suffered - no longer being generated from dried up hydropower reservoirs - and is threatening the agricultural powerhouses of the country. With agriculture accounting for more than 25% of GDP, a profound change is needed or else the worst has yet to come.
Cuban vaccine success
State biotech and pharmaceutical conglomerate BioCubaFarms announced that its Abdala vaccine was >92% effective after three doses. The country has five vaccines in clinical trials. Necessitated by US sanctions, Cuba has a long tradition of producing its own vaccines and has chosen not to import Covid-19 vaccines. Effective development will see the revival of key industries in Cuba and exports would offer a lucrative revenue stream.
India: Covid crisis is keeping the government under pressure
GDP growth will be subdued as the government struggles to raise consumer demand and curb inflation. India will try to accelerate its vaccine roll-out and may not resume its ‘vaccine diplomacy’ before the end of the year. This will create an opportunity for strategic rival China, already outperforming it in regional trade diplomacy, to undercut its neighbourhood influence further.
South Africa: Beyond the third wave
South Africa’s economic recovery continues apace, with roaring commodity demand pushing up the Rand. Yet President Ramaphosa faces a dilemma in dealing with the country’s exponential Covid-19 growth. Niall Ferguson expects further restrictions. But the economic impact of the country’s third wave will be offset by the global commodity boom, with a strong Rand and slower recovery likely keeping rates lower through 2021. Niall is therefore bullish South African assets among EMs.
2021 ESG Shipping Scorecard
Michael Webber’s most recent ESG scorecard looks to see which shipping companies come out on top. He notes that companies with the strongest scores (incl. Genco Shipping, Euronav, International Seaways and more) outperformed the bottom quartile by 51% on a 5-year basis. Michael reaffirms his belief that there is no longer a place in the public shipping markets for companies that do not prioritise strong corporate governance and capital stewardship.
Sustainability and a commodities supercycle
Meeting demands for climate-friendly projects and initiatives could see lithium consumption increase 40-fold by 2030 and the price of copper rise 50% by 2025. If not managed carefully, biodiversity loss will suffer greatly from the oncoming mining expansion – 8% of mines are within national conservation sites and 16% in the remaining wilderness. The World Bank's Climate-Smart mining initiative may well help, but so will recycling minerals….
Dry Bulk Shipping: Potential for epic capesize rally
Jeffrey Landsberg believes that Atlantic basin spot capesize availability will soon become very tight, and China will start to significantly increase their coal imports. Such changes haven’t happened yet, but Jeffrey believes they will happen soon – in fact, a rally could start in the next few days. Watch out!
Volatility is back in commodities!
In response to the Fed’s new tone, commodity prices saw one of the largest YoY moves since 1970 (excl. energy prices), rising 40%. But commodity prices have always been cyclical and Kathleen Kelley claims that this non-supercycle is no different. Outside of the Fed, China’s crackdown in many areas from pollution to Bitcoin will send further shockwaves. The good news? Volatility is back!
Crude oil backwardation extreme and unsustainable
Since the 80’s, a >$4.25 difference between the front month and the strip has seen the spread typically collapse over time. Right now, the front month is very expensive vs forward, with a current premium 50x what the average margin has been over recent years. John Karle recommends shorting front-month crude vs the strip, employing one risk unit to establish a position – seek to add an additional risk unit if the risk spreads to $6.00.